India’s stock markets have been correcting over the last 2-3 months amid a massive sell-off by foreign institutional investors. Global geopolitical concerns and uncertainty around the trade policies of incoming US President Donald Trump and the US Federal Reserve, signalling fewer interest rate cuts in 2025, have led to the FII pullback.
Domestic concerns like slowing GDP growth, disappointing corporate earnings, and volatile food prices have also been a worry for investors.
THE WEEK caught up with Sailesh Raj Bhan, chief investment officer of equity investments at Nippon India Mutual Fund (Nippon MF), to understand the outlook for 2025. Nippon MF is India’s fourth largest fund house with assets under management (AUM) of around Rs 5.5 lakh crore. Bhan shares his thoughts on valuations, sectoral preferences, and assessment of the economy, among other things.
Q/ What were buoyant markets till September that have entered a correction phase in the last 2-3 months? What’s your assessment as we head into 2025?
A/ Looking at 2025, we believe better clarity will emerge in areas like US policy shifts, inflation and the stance of various central banks. From a domestic market perspective, corporate earnings are likely to revive, supported by a late festive season, increased government spending, and improved rural incomes post-good monsoons.
Notwithstanding the recent correction, broader market valuations remain elevated, while large caps are largely closer to historical averages. We believe 2025 could be a year of consolidation, and it’s important to have rational expectations. Asset allocation and investment discipline (equity for the long term) are two important ‘mantras’ that investors need to keep in mind.
Q/ Do you think Indian investors will have to brace for a year of low returns, maybe more declines, given disappointing corporate earnings, a slowing economy and inflation concerns?
A/ We believe that the bulk of the earnings downgrades in the first half are likely behind us and going forward improved government spending, extended wedding and festive season as compared to last year, and robust Kharif and Rabi season would likely result in easing inflationary food prices and resumption of a rate cut cycle can be some of the positive drivers.
At the same time, uncertainty around geopolitical tensions, policy shifts moving away from globalisation to strategic regionalisation, currency movements, etc, can impact the market sentiment.
Thus, while the markets may remain volatile in the short run, we remain constructive on equities from a medium-term perspective as domestic fundamentals continue to be robust and at appropriate valuations, there can be strong investor participation.
Q/ Following the correction, where do the markets stand now in terms of valuations?
A/ Post this recent fall, large cap valuations are close to 10-year averages. While the mid and small caps also corrected similarly, valuations remain elevated, at significant premiums to long-term averages. However, select stocks have witnessed sharp erosion, thereby offering selective opportunities for long-term investments.
Q/ Do you think we shall see FIIs return in a big way as valuations start looking more attractive in 2025?
A/ Allocations by foreign investors are influenced by a variety of factors and are not only limited to valuations. For instance, currency volatility is an important variable for investment decisions. Given the prevailing global macro and geopolitical scenario, the allocations can be calibrated. Better clarity with reference to macro events, policy developments in the developed world, etc., may lead to more sustainable flows as Indian growth possibilities remain robust compared to the globe.
Q/ Where do you see the pockets of opportunities?
A/ While overall consumption is weak, the premiumisation trend remains strong. Some of the global demand-oriented businesses like IT services and metals have minimal risk of earnings downgrades. We believe that, in FY2026, earnings growth for the overall market may be better than nominal GDP growth. Key sectors that will drive earnings recovery include commodities, large lenders, utilities and capital goods.
In the current market context, there are two segments which appear interesting—one, where the valuation appears better based on historical averages, like large Banks and select utilities, and two, where the valuations are elevated but the growth visibility remains strong, like capex, select discretionary businesses. Accordingly, key themes would include large lenders, capex, power utilities and select discretionary plays.
Q/ Which are the sectors where the outlook is more uncertain now?
A/ We would be cautious about themes that have large global linkages like commodities, information technology, chemicals, etc., wherein any sharp change in macros or policy can have a significant impact. While the overall consumption trend was weak, the premiumisation trend remains strong. High food inflation, among others, has adversely impacted mass consumption. Going forward, mass consumption can revive with potential triggers like:
1) Agricultural and rural recovery (rabbi crop),
2) Elongated wedding season as compared to last year,
3) State government spending, and
4) Likely interest rate cuts in FY2026.
Further, the segment has seen a prolonged slowdown over the last two years, with a lower risk of earnings and downsides based on low expectations.
Q/ Where do you see equity markets by December 2025?
A/ It is usually said that market returns in the medium to long term largely reflect the corporate earnings growth. We believe that in the next couple of years, earnings growth for the overall market can be better than nominal GDP growth around the mid-teens range. However, global macro/geopolitical developments are key risk areas to be monitored. Hence, while the equity outlook remains optimistic, it is important to have moderate near-term expectations given the strong base.
